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Home Buyer's Handbook

The Cast of Characters

Meet the players in the home-buying business. While they may all want to help you, they also want to make money as well. “So who are these people and why do they want my money?” you may ask. Introductions are in order. Get to know the cast and learn how to choose the best in the bunch.

Alice, The Real Estate Agent

You’ll find Alice showing buyers through houses every free minute she has —her paycheck rides on selling homes.

Real estate agents are professionals. Their job is to help you buy or sell a home. Be forewarned! Different types of agents have different obligations and interests. You might think that an agent who brings a potential home buyer to a property would be considered a buyer’s agent. Actually the agent may be considered a subagent of the seller’s agent. That means the agent doesn’t owe his or her loyalty to the buyer. In fact, the loyalty of this subagent is to the seller! If you want an agent to act exclusively on your behalf as a buyer, find a buyer’s broker. A buyer’s broker is bound to keep confidences and negotiate the price for you, and can put the terms of your relationship in writing. Before entering into any agreements, you may wish to consult with an attorney to explore all potential options.

The fees you pay to your real estate agent are often included in the purchase price of the home. An agent who lists a home for sale usually shares the agreed upon commission with the agent who brings in a buyer for the house. The commissions are usually a percentage of the sale price of the home. Because these commission amounts depend on the final price, this means that real estate agents have a financial incentive to sell you a higher-priced home.

How Do I Find an Agent?

You can look for a home without an agent, but if you are planning to work with one, ask friends, relatives, or co-workers for recommendations. Interview several agents until you find one you feel comfortable with. Here are some things to ask prospective agents:

Agents may ask you to sign either an exclusive representation agreement or a nonexclusive representation agreement. An exclusive agreement locks you into using one agent from the time of the agreement. Signing a nonexclusive agreement will allow you to work with more than one agent. Keep in mind, however, that an agent with an exclusive agreement may be inspired to work harder for you. If you choose an exclusive agreement, negotiate the length of the agreement so you aren’t locked into the agreement for an unreasonable amount of time—typically no shorter than 60 days and no longer than six months.

Click here for a full explanation of the agreements and disclosures you will be asked to sign. It’s important that you understand them well, because they’ll affect the service you receive and the money you pay your agent.

Linda, The Loan Officer or Mortgage Broker

You’ll recognize Linda by the smoke coming from her calculator. Introduce yourself to her early in the home-buying process. She’s the one who can figure out if you have the right stuff to qualify for a home loan, and she’ll tell you what you can afford. She also gathers and checks all of your credit, employment, and other income records. She’s the first of three people you must impress to qualify for a loan (followed by the loan processor and the underwriter).

Check whether you’ll have to pay Linda even if you don’t take out a loan through her. Some loan officers or mortgage brokers have such a policy. To choose a loan officer/mortgage broker, talk to several and ask each for a complete list of fees. The lender must provide you with a Loan Estimate that gives you an estimate of your settlement charges and loan terms. Compare this Loan Estimate with other loan offers. (Click here for a Closing Cost Comparison Worksheet.)

Pat, The Loan Processor

You probably won’t meet Pat, but you’ll pay him in your closing costs. Pat double-checks all the financial and employment information your loan officer gathers from you. If he thinks you’re a good credit risk, he’ll pass your paperwork on to the underwriter.

Nick, The Underwriter

This character enters the scene late, but with a very important role. He gives final approval for a loan. He goes over your records to make sure you’re a good credit risk for a loan.

Fred, The Appraiser

Fred will give your loan officer an independent opinion of the value of the home you’re thinking about buying. Fred will visit the house you want to buy, compare it to similar nearby homes that recently have sold, and determine a fair market value. He might tell you that the real value of the home is higher or lower than the price you’ve offered to pay. When applying for a FHA or VA loan, you must use an appraiser certified by the FHA or VA, respectively.

Herman, The Truth-in-Housing Evaluator

Herman only works in cities that require a Truth-in-Housing Report. Herman determines if the home meets a particular city’s housing code standards.

Allie, The Attorney

Everyone wants an Allie on his or her side. Her job is to protect your rights and interest and anticipate legal problems. She can be very helpful in complex home purchases. For example, if the home you’re buying has been in foreclosure or has been part of a contested will, she can clarify the terms of your purchase or help you negotiate better terms. A lawyer is especially useful if your new home is For Sale By Owner (“FSBO”)—meaning the owner is not using a real estate agent—or if you have a seller-financed mortgage or a “Contract For Deed.” Some owners who have had difficulty selling their property will offer a contract for deed. In this situation you would make your monthly payments to the owner, who would essentially be the “lender.”

A lawyer also can review your purchase agreement, make sure the seller delivers all necessary documents at closing, and convey a marketable title. Hourly attorney fees can run high, so try to decide how much service you want from an attorney and negotiate a fee agreement in advance.

Clarence, The Closer

Clarence will peer at you from behind stacks of papers at the closing on your house. He’ll make you sign each one, so be prepared for writer’s cramp. Clarence makes sure all the seller’s and buyer’s sales documents are in order, agreed upon and signed on the date of closing. There may be a buyer’s closer and a seller’s closer at the closing.

Clarence may work for a title company that is either owned or commonly hired by your real estate agent’s company. Don’t select a closer just because of this relationship and keep in mind that an independent closer may better fit your needs. You have the right to select the closer of your choice. Shop around for the lowest fee as well as a competent closer. And remember, you have the right and the obligation to read all of your closing documents before you sign them, and to ask as many questions as you want. This is probably the biggest purchase you will ever make in your life, and you should understand every step and every word.

Discrimination and Fair Lending

Everyone involved in the home-buying process should be aware that it is against federal and Minnesota law for real estate agents, sellers, and lenders to discriminate against buyers because of their race, color, creed, sex, religion, national origin, marital status, status with regard to public assistance, disability, sexual orientation, or familial status. These laws are discussed in more detail here.

Discrimination in the home-buying process can take many forms. Some are obvious, but others may be subtle and difficult to identify. For example, real estate agents should not refuse to list or show homes in certain areas. Lenders should not refuse to consider loans in certain areas or refuse to accept applications below a certain amount. These practices are considered forms of “redlining” that may be discriminatory.

Bank regulators are beginning to scrutinize some traditional lending practices that could unfairly screen out individuals on the basis of racial or cultural characteristics that have little relationship to a person’s ability to repay a loan. Some low-income or minority loan applicants may be rejected simply because the lender fails to consider creative ways to approve the loan. For example, an applicant with little or no formal credit history may have a solid record of prompt rent payment, or long-standing charge accounts with local merchants that don’t show up on a credit report. When evaluating an applicant’s income from child support or public assistance, a lender should take into account the fact that this income is tax-free, and is therefore comparable to a higher “gross income” from taxable sources.

In addition, the property appraisal should be an accurate description of the property without subjective criteria that might unfairly influence an underwriter. For example, an appraisal might describe a property as being located in an “old, decaying neighborhood,” when in fact the area may be targeted for urban renewal.